II. Consequences of applied policies
II.1. Political situation
In 2004 Latvia becomes a full-right member of European Union and NATO.
Political situation is stable. Integration into EU and NATO stabilises Latvia’s international
position. Relations with the CIS countries develop on the basis of economic cooperation.
Tension in Latvian-Russian international relations remains and is reflected in internal politics,
but real political or economic actions against Latvia are not applied.
Internal political situation is stable. Despite some turbulence in the government, the overall
political course does not change.
Public integration policies do not contribute to real integration, there are still on the basis of
improving welfare, internal political situation stabilises. Efforts to fight corruption and other
negative phenomena are formal, and consolidation of economic and political powers
continues.
II.2. Economic development policies
Integration into international structures improves economic and political stability.
Macroeconomic situation is stable with moderate state debt and fiscal deficit. Latvia is
obliged to fulfil stability criteria of EMU and it does so.
Disregarding of integration impacts endangers competitiveness of local producers, but this
does not harm economic development as a whole.
The fast progress in creating institutional basis for economic development facilitates
economic development, but partly implementation of adopted policies eliminates potential
gains. Neutral economic policies place all sectors equal and provide the most effective
selection of growing sectors – on the basis of competition.
Even partially implemented, the measures aimed at promotion of high value added
(knowledge based) production and innovation-focused state support policy facilitates
restructuring. Exports of high value added production increases, but also imports increase at
the beginning of the period.
Financing of innovation process increases to 1% of GDP in 2005 and 2% of GDP in 2010.
Funding of R&D from the state budget gradually increases - to 0.5% of GDP in 2005 and
0.8% of GDP in 2010. R&D activities are substantial components in projects subject to
financing from the EU funds.
Facilitating of exports is reflected in higher exports. During the first years of the period
imports increase. Foreign trade balance fluctuates around its current value for some years and
then slowly improves.
The expected annual economic growth would be 5-7%.
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II.3. Sector development policies
Proclaimed sector policies improve stability of the economy. Clear sector policies and stable
macroeconomic environment promote entrepreneurs to undertake more risky business and to
enter high value added sectors.
The development of such businesses will face lack of workforce and innovation ideas, unless
they are organised on the basis of FDI. Partial implementation of the state support schemes
and institutions makes newly created businesses vulnerable to risks. Also lack of precise
knowledge about market opportunities, sector development and hyper-optimistic expectations
about their competitiveness and markets increase probability of failures
Cluster approach promotes coordinated development of sectors, yet determinate time is
needed to engage lacking supporting structures.
The importance of traditional industrial sectors (wood, textiles, food and steel production) and
transit-based services remains at least for some 5-7 years. Traditional industries develop
towards better quality and higher value added production. Better export perspectives are seen
for electronic and electro-technical industry, which develops on the basis of FDI or close cooperation
with foreign enterprises.
The growth is expected in service sector. Local transportation services companies may lose
competition with transportation operators from EU countries.
In the sector of knowledge-based services, IT services remain dominant. ICT services serve
local market. Without special promotion actions, other knowledge-based services
(commercial, legal, education, hospital services) remain neutral to exports and serve mainly
local market. In legal and commercial services FDI-based enterprises dominate.
II.4. Investment
If governmental economic and sector policy and supportive measures are clear and
promoting, investment grows. Also economic development contributes to investment.
It is expected that FDI might grow with integration into the EU. Also clear sector policies
promote FDI. Larger FDI is expected in high value added industries, if these industries enjoy
state support. The appearance of large multinational enterprises in Latvia is doubtful.
II.5. Social development
Social development depends on economic development. Income levels increase slower than
the economy.
Without specific social assistance measures, polarisation of population continues and even
increases.
The share of paid education and health care services increases. The unfavourable
demographic situation deepens the generation conflict.
II.6. Labour supply
Demographic situation remains critical. Low taxes eliminate the capacity of social policies
and demographic trends remain reverse. On the other hand economic development favour
slow increase of birth rates. The number of population declines yet at a slower speed.
Emerging economic structure imposes qualitative rather than quantitative changes in labour
demand, still more labour force is also needed. At the beginning of the period, education level
of population is high, but education is inadequate to market demand. The highest
unemployment remains in early and late age groups.
Scenarios for Future Development
REPORT ON LATVIA 155
The education system adjusts to labour market demand after 5-7 years.
Labour supply remains a critical issue at least 5-6 years (equal to study length). Without
special measures involvement of women, graduates and population in pension age or near to
that remains low.
Immigration increases and may increase ethnic tension.
II.7. IS development
The need for IS remains high and this promotes the development of telecommunication
services and trade and services sectors within ICT industry.
Establishing of state information systems promote investment in ICT and trade and software
sectors of ICT industry. ICT industry transforms to new product developments, yet its export
capacity remains moderate. IT industry serves mainly internal market.
Public funding for development of IS infrastructure is low; some part of the EU structural
funds is allocated for this purpose.
The possibility of significant digital divide is low.
III. “WILDCARDS”
Taking into account the high resistance of a small economy to external and internal shocks we
do not indicate any factor that could mirror a shock in the Latvian economy.
Some turbulence could be caused if:
• economic decline in main markets continues
• Latvian-Russian relations worsen
• There are substantial changes in the current government economic policy or delays in its
implementation
• imbalance between growing demand for high quality labour and supply of such labour,
weakness of local education system
• poor social integration complemented by immigration that encourages ethnic tension and
conflicts
Policy Recommendations
REPORT ON LATVIA 157
POLICY RECOMMENDATIONS
Policy recommendations are divided into two categories: promotion of economic
development and promotion of IS development
I. Promotion of economic development
The priority of economic development policy is to promote competitiveness of the Latvian
economy, which includes creation of external and internal environment that is favourable for
business development and orientation on knowledge intensive industries and services.
I.1. Macroeconomic aspect
Continue integration into the EU and NATO thus creating stable external environment.
Develop medium-term plans for implementation of the Long-term Economic Strategy of
Latvia and achieving its goals:
• creation of favourable conditions for functioning of the economy,
• promoting creation of effective and competitive branch structure,
• lessening of economic disproportion and risks.
Continue to maintain stable macroeconomic environment.
Provide effective functioning of market rules in economy; ensure effective and fair
competition.
Provide effective foreign policy to expand markets (including Eastern markets), where
priority is given to such directions:
• improve economic and political relations with Russia,
• ensure real Baltic co-operation,
• increase activities in CEC markets.
Provide higher labour productivity and competitiveness.
Provide balanced regional development.
Provide effective demographic policy.
Provide effective income policy that allows narrowing social and economic disproportion.
Develop economic research on a regular basis, extend funding to orders focussed on research
of national economy.
Improve the management process of EU structural instruments.
Implement effective state budget formation process to ensure targeted, co-ordinated,
transparent and outcomes oriented use of available resources.
Continue fighting corruption and reduce possibilities of operating of a grey economy sector
Harmonise the legislative framework of the business activity.
Provide effective use of internal investment resources and loans by promoting investment in
industry, using special tax regime (nil or lower corporate tax rate to corporate income
proportionally to investment in industry).
Promote the development of high tech and high value added industries – support to
development of economic clusters (especially education and R&D components),
158 FACTORS AND IMPACTS IN THE INFORMATION SOCIETY
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implementation of the National Innovation Program, state contribution to financing of
innovation process.
Improve market access for Latvian enterprise – implementation of National Foreign Trade
Promotion Concept and relevant programs, establishing foreign trade promotion
organizations: agencies, research, economic attached services in foreign countries.
Develop basic infrastructure.
Improve statistical reporting and analysis of processes in fields of development of high-tech
industries and innovation in order to elaborate proper state policies.
I.2. Sector aspects
I.2.1. Medium term intensive structural reforms
The priority of medium term structural policy is to increase share of knowledge intensive
industries thus promoting production of higher value added
Assess sector development trends in the main markets and forthcoming important structural
changes on the basis of fast technological development that may lead to:
• accelerating and massive vendor consolidation cycle followed by further ramification of
this, giving new ability to regain pricing power in several technology sectors,
• challenge of new productivity gains through the replacement or greatly diminished role of
entire industries.
Elaborate lacking sector policies (attention must be paid on knowledge intensive service
sectors) on the basis of these assessments.
Stimulate public-private partnership in innovation.
Provide effective basis for development of knowledge intensive industries by development of
education and science.
Provide fair competition in selection of perspective sectors and enterprises.
Elaborate research based monitoring of sector development and reasonable flexibility of
policies towards new challenges.
Encourage concessions (attraction of private capital to state functions) as a method to improve
public services and infrastructure.
Support SMEs.
Elaborate state funded support institutions and systems that help business to acquire quality
standards and conformity assessment.
I.2.2.Investment
The priority of investment policy is to promote investment directly in the knowledge intensive
industries and industries and sectors that support the development of such industries.
Promote investment in industry, knowledge intensive industries.
Develop investment-supporting institutions (investment funds, credit guarantee agencies,
special credit lines).
Develop risk capital institutions.
Policy Recommendations
REPORT ON LATVIA 159
I.2.3. Foreign trade
The priority of foreign trade policy is to promote market for industries and services producing
high value added and provide favourable conditions for imports.
Elaborate of export promotion strategy for knowledge-based industries and services.
Improve institutional basis of foreign trade (promotion institutions, customs, statistics).
Activate trade activities in Baltic economic area, Eastern markets (Russia, Byelorussia,
Ukraine) and the rest of world.
Establish permanent research-based monitoring of foreign trade developments.
Enhance market growth through attracting FDI in knowledge intensive sectors.
I.2.4. Innovation
The priority of innovation policy is to create knowledge-based environment that is necessary
for development on knowledge intensive industries, which means creation of harmonised
innovation system and providing its operation.
Continue to improve regulatory framework for innovations and the corresponding financial
incentives.
Clearly define the roles and responsibilities (including financial) of policy-making institutions
in innovation and the ICT sector.
Provide full liberalisation of telecommunication markets in order to favour the development
of knowledge intensive services and overall development of society on the basis of
information.
Implement measures to improve the prestige of science.
Activate work to increase the students uptake of science at second and third levels of
education and to promote positive attitude to careers in science, engineering and technology
(special programs, awards, National Science Days and Science Weeks, TV series for children
and students.
Establish a culture of scientific and technological innovation and increased R&D activity.
Concentrate science promotion measures into a single National Program for science
promotion.
I.2.5. Labour supply
The priority of the labour policy is to improve labour supply to the economy as a whole and
especially to knowledge intensive industries which includes improvement of demographic
situation (impact quality and quantity) and education (quality).
Activate policies that facilitate improvement of demographic situation.
Improve professional education.
Adjust unemployment training to market demand
Improve labour qualification in rural areas (by using compensation of study credit for
graduates who stay for work in rural areas).
Provide better involvement of postgraduates and people in pension age and near to that by
creating special mechanisms.
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Develop special employment plans for elimination of employment in rural territories,
including research, training and other measures.
Involve NGOs in developing entrepreneurship skills and fighting unemployment in less
developed territories.
I.2.6. Education
Improve financing of education.
Improve quality of education at all forms and levels.
Restore exact subjects (physics, chemistry, mathematics) in mandatory school programs
Restore subjects that develop intellectual skills (music, arts) – so called “interest subjects” in
programs of basic education,
Improve teachers’ qualification and technical provision of schools.
In professional education: adjust education to potential labour market need
Improve quality of professional education, measured as employment of graduates.
Improve education in natural science; improve interconnection between research at university
level education and business.
Implement interface institutions that develop business skills of graduates.
Replace current practice that full time students have business activities with study practices at
enterprises.
Increase market orientation in adult education and unemployed training.
Strengthen education of managerial talents and skills in secondary schools.
Address the continually declining number of students choosing science subjects at second and
third level.
Increase science activities and science attractiveness for young people.
Assess and adjust to forthcoming skills shift within the IT workforce to areas such as
broadband, wireless, Linux, content management, real-time analytics, data mining, security,
middleware, certification skills, business intelligence and knowledge management and others.
I.2.7. Research and development
The priority of innovation policy is to create knowledge that is necessary for development on
knowledge-intensive industries.
Develop industrial cluster approach in establishing a knowledge-based industry, where R&D
is a necessary component.
Increase understanding in private companies about the need to invest in R&D in order to
generate greater rewards from their future business activities.
Create shared R&D infrastructure that is made available to public and private research
institutions and private enterprises.
Consolidate efforts of public and private institutions in creation of such infrastructure.
Improve commercial application of research results, establish privately run research centres
adjacent to the research institutes that would be part-funded by the private sector, serving the
Policy Recommendations
REPORT ON LATVIA 161
role of an avenue for the staff of the research institutes and universities to take part in applied
research and contribute to the creation of companies and products.
Increase access to risk capital.
Incorporate measures favouring creation of information society into utilising the EU structural
adjustment funds.
I.2.8. Social issues
The priority of social policy is elimination of social disparities.
Elaborate income policy aimed at lessening of income differences.
Continue increasing of minimal wage.
Provide stability of social insurance systems, including pensions.
Improve health care.
II. Promotion of IS development177
The priority of policy measures promoting IS development is to improve availability of
information and information technologies, as well as increase supply of information systems
in order to facilitate modernisation of the economy on the basis of wider use of information
and ICT and its competitiveness.
II.1. General policy measures
The priority of general policy measures is to elaborate clear and comprehensive IS policy and
to provide its implementation.
Elaborate the national IS strategy, which accounts close interconnection of IS and economic
development in the way that IS is a precondition of a dynamic economic development and
innate satellite of modern knowledge based and open economy.
Establish precise and realistic objectives in implementation of IS, such as eGovernment,
eProcurement by government and local governments, eHealth, cyber security and privacy, the
school-room in the future, the work-place in the future.
Adopt public-private partnership as means for implementation of the national IS strategy.
Adopt electronic communication sector policy (Guidelines of the Electronic Communication
Sector Policy, 2004-2008), including the legislative documents, institutional settings,
responsibilities and financial provision necessary for its implementation.
II.2. Sector level
II.2.1. Development of infrastructure
The priority of infrastructure development is to increase availability of information
technologies and information for business and population.
Increase state participation in building of technologically advanced electronic connection
network (broadband) to every home in order to make basic IS infrastructure affordable
regardless of economic conditions of the population and business and bridge forthcoming
digital divide.
177 On the basis of proposals for facilitating of Internet use - by Association of Internet of Latvia, The Ministry
of Transport and Communications of Republic of Latvia, Department of Informatics
162 FACTORS AND IMPACTS IN THE INFORMATION SOCIETY
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Promote Internet connections in the civil sector; install Internet connection in new and
renovated local government apartment buildings.
Promote liberalization of telecommunication market and optimisation of telecommunication
prices on the basis of fair competition.
Use licensing and tariff policy as instruments for promotion development of infrastructure.
Introduce a third mobile telecommunication operator as soon as possible.
Establish two state fixed telecommunication networks – consolidation of networks of state
enterprises Latvenergo (energy provider), Latvijas Dzelzcels (railway), The State Radio and
Television Centre ant The State Information Network Agency.
Attract Global Internet service providers to Latvia, which will have a positive effect on the
decline of prices for international Internet.
Promote computerisation of enterprises by increasing offer of electronic services in public
sector and services.
Continue elaboration of projects which promote installation and use of computers in local
governments and state sector.
Organize campaigns of new and used computer equipment sell-outs together with computer
technology enterprises.
Elaborate a state program which promotes private persons to buy computers with tax
discounts.
Implementation of digital signature and eCommerce to be enacted for secure services.
II.2.2. Development of information content
Establishment of a high quality government portal to provide information on policies and
services of the government.
Involve local governments in Internet content development, they should provide information
about tourism and history, gathering information on a special web portal,
Encourage use of the Latvian language and terminology in the electronic means of
communication.
Develop Public Library Information system - all libraries should be connected in one network
with a common database; also all information available in libraries should be transferred into
electronic format,
Promote broadening of existing digital information by being involved in EU projects,
Elaborate education materials in electronic form by involving schools and higher education
institutions,
Improve existing distance learning programs and develop new programs for a wide range of
population.
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